The German Employment Protection Act - How does it work in company practice?
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Diskussionspapiere
___________________________________________________________________
The German Employment Protection Act –
How does it work in company practice?
Karen Ullmann/ Dr. Silke Bothfeld
WSI-Diskussionspapier Nr. 161
Juni 2008
WSI-Diskussionspapiere (Print) ISSN 1861-0625
WSI-Diskussionspapiere (Internet) ISSN 1861-0633
Wirtschafts- und Sozialwissenschaftliches Institut
in der Hans-Böckler-Stiftung, DüsseldorfIn der Reihe „WSI-Diskussionspapiere“ erscheinen in unregelmäßiger Folge Arbeiten aus dem WSI zu aktuellen Vorgängen auf wirtschafts-, sozial- und gesellschaftspolitischem Gebiet. Sie basieren u.a. auf Vorträgen, die Mitglieder des Instituts gehalten haben oder auf gutachterlichen Stellungnahmen, können aber auch Diskussionsbeiträge zu ausgesuchten Einzelthemen sein. Für den Inhalt sind die Autorinnen und Autoren selbst verantwortlich. Dieses und andere WSI-Diskussionspapiere finden Sie als pdf-Datei unter: www.wsi.de Gedruckte Einzelexemplare sind zu beziehen über Wirtschafts- und Sozialwissenschaftliches Institut in der Hans Böckler Stiftung (WSI i.d. HBS), Hans-Böckler-Str. 39, 40476 Düsseldorf Karen Ullmann Former Academic assistant at the Institute of Economic and Social Research (WSI) Hans-Böckler-Foundation e-mail: karenullmann@gmx.net Dr. Silke Bothfeld Institute of Economic and Social Research (WSI) Hans-Böckler-Foundation Hans-Böckler-Str. 39 40476 Düsseldorf Germany e-mail: silke-bothfeld@boeckler.de
Diskussionspapiere
The German Employment Protection Act –
How does it work in company practice?
Karen Ullmann/ Dr. Silke Bothfeld
WSI-Diskussionspapier Nr. 161
Juni 20082 Abstract: The article describes the manner in which in companies make decisions about dismissals. It begins with the presentation of a number of theories, which attempt to depict the complexity of the employment relationship. This is followed by the presentation of the legal framework and the various options for action at the respective levels. The third section draws together empirical data that illuminates the relevance of the various steps involved in the termination of the employment relationship. It shows that the prevalent assumptions that companies hold regarding the effects of the KSchG are unfounded. Key words: Employment Protection Legislation, Dismissal, Severance Payment. The German version of this text is published in: DGB-Rechtsschutz GmbH, 2008, „Die Sicherung von Arbeitnehmerrechten – 10 Jahre DGB Rechtsschutz GmbH”, Nomos-Verlag, Baden-Baden (forthcoming).
3
1.Introduction 5
2. Engagements and dismissals in the shadow of the legislative
regulation of employment – theoretical considerations 6
2.1 The limits of macro-economic analyses 6
2.2 Company behaviour from the micro-analytical perspective 8
Labour market institutions as limitation and support to entrepreneurial action. 8
The nature of the employment relationship and economic pressures as the most
important determinants of personnel decisions. 9
Application of the des Employment Protection Act in practice 11
2.3 Analytical Framework: Stages of action in the adjustment of
company personnel levels 12
3. The three levels of action in company reality 16
3.1 The relevance of termination of the employment relationship in the
German employment system 18
Choice of Termination Form 18
Termination Initiative 21
3.2 The application of employment protection legislation in
company practice 23
Inquiry into legitimacy and the term of notice 23
Justification of termination on operational grounds according to the
Employment Protection Act (KSchG) 254
Works Council involvement in terminations 26
Knowledge of the law within companies 27
Refrainment from Dismissal 30
3.3 Cost of Terminations 31
Termination Payments 31
Frequency of legal action 33
Results of the Proceedings 35
4. Conclusion 35
Literature 375
1. Introduction
The focus of discussions on labour market politics moves again and again to
dismissal protection, which, as an element of labour market regulation, is attributed
partial responsibility for stagnating labour market development. Carried further, a
relationship is assumed between the rigidity of dismissal protection and the
employment trend, which is largely based on implicit assumptions about company
behaviour. Above all, it is assumed that German dismissal protection makes
dismissal more expensive and consequently deters companies from necessary new
appointments. These theses have found their way into German labour market
research without the assumed interrelationship being thematised in any way. Rather,
the company is usually perceived as a black box, so that the internal company
decision-making processes and motivation involved in personnel planning remains
unconsidered (cf. on this subject, e.g. the articles by Jahn/Schnabel 2003;
Jahn/Walwei 2003; Jerger 2003; Jahn 2004). In fact, aside from partial investigations
conducted by human resources management, there has been no representative
empirical research into how companies implement labour legislation since the Max-
Planck Institute study of 1981 1 , and consequently there are few substantiated
findings about current company employment and dismissal practices.
This paper follows twin goals. On the one hand, it intends to show the spectrum of
possible company behaviour while considering the theoretical principles of human
resources management and in doing so identify complimentary or conflicting factors
in the explanation of hiring and dismissal decisions. On the other hand, an empirical
analysis of dismissal processes will illustrate the effect of labour law in company
practice and so question the purely benefit-oriented “cause and effect” schema. This
makes it clear that company practice is determined by a multitude of sometimes
complexly interwoven factors among which labour law plays only a marginal role.
The structure corresponds to these two research goals. The first section discusses
existing empirical findings and theoretical perspectives, identifies alternative options
for action and relates these to the termination process. In the second section,
1
This research was commissioned by the Federal Ministry of Employment and Social Affairs and had the goal
of researching dismissal protection and practice. Five sub-surveys were conducted: a representative, written
survey of companies per post (612 companies were questioned about the general process of termination and
a further 804 companies were asked about their last case of termination), a representative, written survey of
works councils per post (740 cases), a representative, verbal survey (879 persons), plus an analysis of labour
court files, including questioning Judges and legal representatives and an analysis of collective labour
agreements. The questioning of judges and DGB legal protection secretaries was conducted as a complete,
written survey by post (The rate of return lay at around 50 % in each case), a random sample was selected for
the questioning of owners and lawyers (Falke et al. 1981).6 company practice provides the basis for demonstrating the extent to which employer- initiated termination competes with other instruments during personnel adjustments, and how dismissal is carried out in business. The article is limited to an explorative approach and concentrates primarily on a descriptive presentation of findings. This approach permits a comprehensive presentation of findings from the only current representative survey on this subject: the WSI Survey on the Termination of Employment Relationships (2001) and the WSI Survey on Company Personnel Policies (2003). Where it makes sense or appears to be necessary, the findings are supplemented by analyses from the IAB Betriebspanel (Institute of Employment Research) and the Socio-Economic Panel (SOEP). Data is also drawn from the KÜPRAX Project. This project analysed dismissal disputes that were brought before the Labour Courts in 2003 (Höland et al. 2007). This means that all currently available data sources on this subject are used. 2. Engagements and dismissals in the shadow of the legislative regulation of employment – theoretical considerations 2.1 The limits of macro-economic analyses As an element of the institutional labour market conditions, dismissal protection has occupied a central position in employment policy discussions since the OECD Job Study of 1994 (OECD 1994). The question of the effect of dismissal protection on the level, duration and structure of unemployment has given rise to a multitude of macroeconomic studies. However, it has not been possible to prove an identifiable and unequivocally positive relationship between the rigidity of dismissal protection and the rate of unemployment, though an effect on the dynamic of labour market processes – and therefore on the duration of long-term unemployment suggests: “All time spent in anxiously complaining about the rigidity of labour market regulation, employment protection and minimum wages is probably wasted“ (Nickell/Layard 1999: 3080; cf. the discussion on this subject in Truger/Hein 2003 and the overview in OECD 2004: 82). There is also doubt that employment protection has a clear effect on the development of productivity. In fact, regulation of the product market rather than of the employment market has been made responsible for slowing down productivity (Nicoletti and Scarpetta 2003), and the lack of long-term investment in the future, for example in training, for ongoing high unemployment (Aiginger 2004). In contrast, one suspects a positive relationship between employment protection and long-term unemployment (Elmeskov, Martin, and Scarpetta 1998), and a negative relationship between employment protection and production growth in those
7 countries where the wage parties negotiate their wages in neither a coordinated nor a completely decentralised manner (Scarpetta und Tressel 2004). The latter does not apply to Germany however, since wage negotiations are largely coordinated. International comparative macroeconomic studies are afflicted by two methodological problems. Firstly, the development of indicators demands objectifying and reducing the complexity of labour law. The conventional EPL indicators (Employment Protection Legislation indicators, cf. Nicoletti, Scarpetta and Boylaud 1999: 40 ff.) mostly only consider the legal situation related to the regulation of employment relationships. The “cost of dismissals” or the “rigidity“ of employment protection is therefore not measured on the basis of empirical findings on the actual application of the legal conditions, but solely on the basis of selected formal legal regulations. Provisions that regulate application, which are highly relevant for the practice, such as, e.g. the duration of the term in which legal action can be filed and the openness of many regulations to change by collective labour agreement, are largely excluded from the analyses or cannot be compared due to the depth of their practice-related differences. For example, Denmark is often cited as a country without legislative dismissal protection. What is not taken into consideration is that here, dismissal protection is frequently regulated by collective labour agreements, which demonstrate a very high level of coverage. Since the individual steps in establishing the factors are not provided, it also remains unclear how, e.g. the cost of compensation for dismissal is evaluated, which German legislation anticipates only under exceptional circumstances but which is nevertheless often a result of negotiations between employers and employees. Consequently, the complexity of the various dismissal protection regulations and their application is usually only made clear in comparative legal studies (cf. on the subject, Zachert, 2004). In addition, the correct and immediate application of the formal regulations is assumed. Secondly, comparative studies are revealed to be methodologically problematic to the extent that the real costs of the regulations have been far from completely documented. Namely, the data increasingly includes the regulation of functional equivalents (fixed term and personnel leasing). Sometimes the interconnection between labour law and social security systems is also included (OECD 2004: 91). Possible long-term costs for the company resulting from the specialist workers’ lack of commitment to the company and from the loss of these workers also remain unconsidered, particularly as they are difficult to measure and quantify. Generally considered, these country comparisons underestimate the complexity of the social and economic systems in which the regulations for dismissal protection are embedded (for a revised perspective cf. OECD 2004: 64). Analytical perspectives
8 whose theoretical and empirical focus is on the actions of the actors within companies appear to be more promising in their capacity to explain the effect of labour law regulations on company behaviour. 2.2 Company behaviour from the micro-analytical perspective Labour market institutions as limitation and support to entrepreneurial action. In macroeconomics, especially transaction cost theory (Williamson 1985) offers an approach to explaining company decisions. In contrast to the simple neoclassical contract model, in which contracts are negotiated through the free interaction of (market) forces, transaction cost theory assumes that the organisation and realisation of company actions (transactions) gives rise to costs, the scope of which are largely determined by the conditions of the institutional framework and which are not compensated for earnings: Hiring suitable employees entails information and search costs and possibly qualification costs; the employees’ performance must be monitored and, where necessary, motivated through incentives or disciplinary action, and employee dismissal must also be planned and realised. Consequently, the costs incurred through dismissal, in the form of severance payments, legal action against unfair dismissal or backwages, are considered typical “ex-post” transaction costs. In this respect employment protection legislation can increase costs and therefore, it is not surprising that employers perceive labour market regulation as a constraint and limitation of their entrepreneurial action. However, institutional regulations can also improve the transactions in that they set transparent and binding rules and minimise variance in behaviour through routines and practices and consequently reduce the associated costs. Because the conditions for employer-initiated dismissal are specified in the Employment Protection Act, it offers a binding legal basis that reduces the insecurity of both contractual partners in respect to their respective performance and obligations, and as such reduces the potential for conflict. For the German employment system, a typical “side effect” of the relative security of employment associated with the legislative regulation of labour is the willingness of employees to acquire company-specific qualifications and to remain in the company long term. Thus, labour law does not only act as a constraint, but also in ways as a support for companies.
9 The nature of the employment relationship and economic pressures as the most important determinants of personnel decisions. The way in which is dismissal protection is practiced in companies and the extent to which it is actually a cost factor depends not only on the individual appraisal of labour legislation and the anticipation of possible sanctions. In fact, two additional factors play an important role: The relationship between the employer and employee within the firm and the existence of pressure to comply, i.e. the company’s perception of this pressure. The relationship between employer and employees can be marked by a purely functional and rather short-term calculation or through a long-term and tendentially cooperative and social personnel policy and culture. From the perspective of transaction cost theory, the employment relationship is considered a “relational” contract, which is characterised by the fundamental openness and long-term nature of the contractual relationship. Work performance cannot be agreed to in fine detail or for an extended duration in the employment contract so that the employment contract is a social relationship embedded in a complex social context (Ebers/Gotsch 2002: 231). The actual fulfilment of the contract (the assurance of employment and payment wages in exchange for the employee’s performance of tasks) cannot be automatically taken from the formal legal framework. Rather it is determined by a series of complex factors such as motivation, mutual trust, company promotion and the company culture (for elaboration, cf. Sadowski 1986). The same phenomenon is discussed in the legal literature under the heading “incomplete contract”. Further, the institutional economics perspective, to which transaction cost theory belongs, recognises that the parties to the contract (can) act rationally only to a limited extent because the amount of available and processed information is inevitably limited and therefore decisions are always made under a greater or lesser degree of uncertainty. For example, companies can only estimate their personnel requirements when hiring or dismissing staff; they cannot determine their prospective requirements exactly. Because personnel requirements can change, the Employment Protection Act (KSchG) makes provision for dismissal on urgent operational grounds. Of course, companies must not necessarily be informed about the legal conditions in order to engage in hiring or dismissals. As long as no conflict results, the lack of information about labour law is hardly noticed so that the companies evaluate their level of information as satisfactory in spite of their lack of knowledge. In this case, labour law has no relevance to company
10 actions, whereby both generous paternalistic and also short-term profit-maximising behaviour are by all means compatible with transaction cost theory assumptions. A further behavioural assumption of transaction cost theory is interesting in terms of explaining the behaviour of the various parties in the company. According to this, the contract partners are opportunistic or even sly and may act contrary to their knowledge of the law (Ebers/Gotsch 2002: 226). So it is theoretically plausible that the company provides its employees with false information, threatens them or attempts to prevent them from forming a works council. Conversely, the parties may choose a cooperative strategy and participation by employee representatives if they expect that this will result in a reduced amount of (expensive) conflict, better information or the conclusion of linked agreements. In any case, the respect and the departure from formal regulations can be consciously calculated: An unsystematic approach and the acceptance of legal disputes can be just as economically worthwhile as the long-term design and planning of the Personnel Department. On the employee side, the reaction to termination is also unforeseeable since the employees possess quite different levels of knowledge and expectations in terms of asserting their rights. Above all, they have an interest – although of varying intensity – in the maintenance of the employment relationship, which is dependent on their social security, their individual reemployment chances and their life situation. The assumption that an unjust dismissal is automatically followed by legal action is therefore unrealistic. In all cases, the behaviour on both sides is also influenced by other institutions, such as the form of unemployment insurance or the existence of early retirement regulations, which reduce the conflict potential of dismissals. The behavioural science organisation theory, which is more closely concerned with behavioural assumptions and conceptualises companies as the expression of a multitude of operational behaviours, drives the unforeseeability of business decisions to the extreme with the assistance of the “garbage can“ model (cf. the collected essays of March 1990). According to this perspective, the solution to problems, e.g. personnel decisions, can occur ad hoc and by chance, whereby the parties involved tend to oriente themselves on interpretation patterns (organisation culture) that are socially and culturally influenced, and widely accepted (Berger/Bernhard-Mehlich 2002: 159). Thus, a broad spectrum of company behaviours can be explained by transaction cost theory and behavioural science. A second complex of factors, in our estimation, is the extent to which the reduction of personnel is viewed as a necessary and unavoidable solution. From the perspective of the business economics situational approach, the perception of problems is considered to be partly determined by other areas of action (e.g. goods and product markets) in the environment. Central to this approach is the assumption that formal
11 organisational structures have a strong influence on the efficiency of organisations, but that, on the other hand, there are no universally efficient organisational structures. In order to act efficiently, organisations must adjust their structures to the respective situations (Kieser 2002: 169). Consequently, labour law provisions are in no way uniformly implemented. Rather, the implementation is influenced by each company’s respective reality, which in practice is confronted with the law. Of particular influence here is the company’s size and branch, and the associated respective specific structural characteristics on the one hand, and its culture and traditions on the other. The interpretation of the situation under labour law is correspondingly diverse. Because companies are not obligated to conduct personnel planning, internal decision-making takes place within the framework of more or less developed structures. Consequently, in this perspective the adoption and diffusion of labour law are also considered processes of organisational learning (on the problem of organisational learning, cf. the contributions in March 1990). Here, changes to labour legislation are picked up and implemented with varying rapidity depending on the parties involved, their individual situations and the number of cases arising. This makes it possible to classify companies into various types according to their labour law culture. The spectrum ranges from an approach that is strictly guided by the regulations to an economic perspective in which the cost of complying with a regulation is weighed against contravention, through to the extreme case where labour law regulations are simply – consciously or unconsciously – ignored (Schramm/Zachert 2005). Application of the des Employment Protection Act in practice The structure of the formal legal framework leaves no room for the development of a political personnel strategy that would apply to all companies. Rather, it can be expected that a company’s economic personnel culture and the micro-economic demands a company experiences, i.e. their interpretation, influence personnel decisions. As such, labour law is a necessary but insufficient variable for the explanation of personnel-political actions. In summary, the theoretical considerations provide the basis for at least three hypotheses on the application of labour law and the generation of costs through the legislative regulation of labour:
12 1. The interpretation of the Employment Protection Act (KSchG) is relativised by competing problems in the company’s environment. Problems connected to the product or goods markets prove to be much costlier and therefore more important. The strategy of cost reduction through personnel reduction and the signalling effect of saving (personnel) costs appears to be gaining significance with the increasing importance of stock exchange results so that – independent of understandable changes – an increasing amount of pressure for adjustment is experienced. 2. Transaction cost theory stresses the significance of information, i.e. of insecurity for operational action. In this respect, the Employment Protection Act (KSchG) must be considered not only a limitation but also a support that tends to standardise termination processes and make them transparent. In addition, because it protects the employees from arbitrary dismissal, it also increases motivation and consequently productivity, and provides an incentive for investment in company-specific training. 3. The “rational” of cost-calculated action by the interest groups in a company presents only one type of possible reaction. At the same time (personnel) decisions are also made under the influence of cultural and social factors and routine procedures. From this perspective, it is also possible that the company completely ignores the provisions of labour law and orients itself on its peer group, i.e. on other companies. The provisions of labour law are then only of relevance when it came to problems and the company is confronted with the valid legal situation (possibly in court) in order to solve these problems. 2.3 Analytical Framework: Stages of action in the adjustment of company personnel levels Three typically characteristic stages can be distinguished when analysing the role of labour law in reducing of employee numbers: The choice of strategic personnel policy, the application, i.e. how the provisions of dismissal protection are handled and the company implementation of termination (Figure 1).
13
Fig. 1: Stages of Action in Company Personnel Adjustment
1. Strategic personnel strategy
a) Choice of Termination of permanent Circumvention I: Circumvention II:
personnel strategy employment relationships Reduction through, Fixed-term employment
e.g. early retirement policies & temp. workers
b) Choice of Dismissal by Employer Dissolution of the Termination initiated
termination form employment contract by employee
2. Application of the KSchG regulations
a) Verification of Term of Notice Special Termination Protection
legitimacy and
terms of notice Compliance Non-compliance Compliance Not applicable/
Non-compliance
b) Verification of
KSchG applicability KSchG applicable KSchG not applicable
c) Reasons
Operational person-related conduct-related
(under KSchG)
3. Implementation in company
a) Notification of Works Council Hearing No Works Council Hearing No Works Council
Termination
b) Negotiation/conflict Acceptance of termination Settlement out of court Employee threatens to
with/without compensation with/without compensation initiate legal action
c) Court involvement Decision made Legal Compromise (Withdrawal of action
by Labour Court with/without compensation by employee)
d) Implementation Dismissal without legal Dismissal with payment of Continued employment
dispute and without compensation/backpay
compensation
© WSI 2005
In choosing the approach of the personnel policy, a decision is first made about the
nature of dismissal of the affected employees (Stage 1). Here, the provisions for
fixed-term and temporary workers are effectively “functional equivalents”, which –
with appropriate planning – make it possible to avoid dismissal processes (cf. also
Zachert 2004). A reduction in personnel can also be achieved by not reoccupying
positions that become vacant or by making use of the provisions of social positions
such as semi-retirement or the reduction of working hours to reduce the volume of
work. In this way, conflicts associated with employer-initiated dismissal can be
minimised in advance (1a). Either a dissolution agreement can be concluded with the
affected person or the employer can directly or indirectly call upon the person to give
notice (1b). For employees to terminate the employment contract themselves is –
unless a seamless transition into new employment is found – unattractive for the
employee, because the self-initiated termination of the employment relationship can14
result in their eligibility for unemployment benefits being blocked for of up to 12
weeks, which can consequently reduce their entitlements. According to a judgement
of the Federal Social Court, a period of ineligibility can result not only from the
conclusion of a dissolution agreement, but also from the conclusion of a so-called
“Winding-up Agreement” in which the dismissed person enters into an agreement
with the employer to accept the dismissal within the term in which legal action can be
initiated through the Labour Court. Only when there are important grounds for
concluding such a contract, does it fail to result in a period of ineligibility. If the
dismissal is objectively justified on grounds that are not conduct related, this
constitutes an important ground. 2 However, should this compromise be concluded
before the Labour Court, no period of ineligibility is imposed on principle (on this
problem, cf. Kramer 2004). Consequently, this precedence reduces the employee’s
willingness to sign such contracts and possibly increases the occurrence of legal
action. Following the introduction of Section 1a of the Employment Protection Act
(KSchG), according to which the employer can offer the employee compensation in
the written notification of termination, to which the dismissed person may only lay
claim if they refrain from pursuing legal action, the Federal Social Court deliberates to
waive investigation of the legal validity of the dismissal if the amount paid as
compensation does not exceed the level anticipated by Section 1a of the
Employment Protection Act (KSchG), i.e. half of the monthly wage per year of
employment. 3 On the other hand, employees may prefer to terminate the
employment contract themselves in order to avoid any possible disadvantages
associated with dismissal during future job applications.
Should a company decide to dismiss an employee, the legitimacy of the dismissal
and of any possible special dismissal protection must be checked and the terms of
notice must be observed (Stage 2). If the Employment Protection Act applies to the
company, the management must provide grounds for the dismissal, which may relate
to the employee’s person or conduct, or to urgent operational business requirements,
in keeping with the act. Should dismissal be due to operational requirements, all
employees who perform comparable tasks must be identified in order to carry out a
so-called social selection. According to the most recent legislative amendments, 4
increased consideration can be given to operational requirements, especially
2
Federal Social Court, Judgement of 12.07.2006, B 11a AL 47/05, published in: Neue Zeitschrift für
Arbeitsrecht, Issue 23/2006, p.1359
3
Federal Social Court, Judgement of 12.07.2006, B 11a AL 47/05, published in: Neue Zeitschrift für
Arbeitsrecht, Issue 23/2006, p.1359
4
Federal Law Gazette No. 67 of 30.12.2003, BGB. Part I 2003, No. 67, 30.12.2003, p. 3002.15
differences in performance between employees. A further relaxation for the company
is that in the event of a compensation agreement (“Interessenausgleich”) the
employer can compile a list of names together with the works council, i.e. jointly
select the employees to be dismissed. In this case the burden of proof is reversed:
Normally the employer must provide evidence that the dismissal is due to operative
requirements; however, in this case the dismissed employee must provide evidence
that there was no urgent operational necessity for the termination. In addition, the
selection of those to be dismissed can only be legally challenged if it is grossly
erroneous. If an employee has been selected for dismissal, the dismissal must be
issued in written form (Stage 3). In the case of dismissal, the works council only has
a right to information, i.e. it has the right to be heard prior to the dismissal, to be
informed about the person and the grounds for dismissal (3 a). 5 Disregard for this
obligation makes the dismissal ineffective. Should the works council disagree with
the dismissal, and the employee decide to take legal action, he/she must continue to
be employed by the company during the proceedings. 6 The dismissed person can
accept the dismissal independent of an objection by the works council, he/she can
attempt to negotiate a dissolution agreement and/or a severance payment or
threaten to take legal action (3b). The situation described above applies here; the
negotiating position of the dismissed person is restricted in that the participation in
one’s own dismissal leads to a partial loss of unemployment insurance benefits. The
right to severance pay exists in only two cases. When other persons are
simultaneously dismissed, this can result in the obligation to compile a social plan,
which is usually accompanied by redundancy pay. 7 The social plan must be
negotiated by the management and the works council. If there is no works council,
there is no obligation to produce a social plan. If proceedings are already pending
before the Labour Court, the employee has a right to redundancy pay in the event
that he/she is successful before the court but cannot be reasonably expected to
5
In contrast, new engagements and the classification, reclassification and relocation of personnel requires
consent, whereby this right is limited by the fact that the works council can only withhold consent for few,
clearly defined reasons (Section 102 of the Works Council Constitution Act (BetrVG)). These grounds include,
e.g. failure to duly advertise a position in the company, contravention of the law or company agreements and
the violation of company regulations.
6
Under certain circumstances, the claim of continued employment can also be successfully asserted without an
appeal through the works council, e.g. if the dismissal is obviously illegal (cf. Federal Labour Court, Greater
Senate (“großer Senat”) decision of 27.02.1985, Az.: GS 1/84, BAGE 48, 122-129).
7
Social plans can only be concluded in companies with a works council and in which a specific percent of the
employees are to be dismissed due to changes in the company (Section 112, 112a of the Works Council
Constitution Act (BetrVG)). Social plan termination payments are therefore almost exclusively paid by large
companies. Termination payments are negotiated for the complete social plan and not for those affected
individually, cf. on this subject Fn. 2816
continue the employment relationship. 8 The newly introduced Section 1a of the
Employment Protection Act (KSchG) recognises an “entitlement“ to compensation
only when the employer indicates in the notice of dismissal that the dismissal is due
to operational grounds and offers compensation on expiry of the term in which legal
action can be filed. Sometimes reference is made to Section 1a of the Employment
Protection Act (KSchG) as having introduced a “right to compensation” (Marczynski
2004; Spieß 2004). However, a right as such is not provided by the regulation. It is an
improvement to the extent that if this compensation is accepted, a period of
ineligibility for unemployment benefits is not imposed.
Where appropriate, the dismissed person can file a complaint with the Labour Court
within a term of three weeks. In contrast to conditions in other European countries,
this comparatively short deadline for lodging a complaint 9 increases the company’s
legal security. The court usually suggests a compromise with – or also without –
compensation or ends the conflict with a decision (3c). Costs are incurred for legal
representation in all cases before the Labour Court, given that legal representation is
used. 10 If the employer loses the case, the employment relationship is not ended by
the dismissal so that the obligation to pay wages continues, even if the employee has
been released from duty (backpay). 11 If the dismissal was legally justified, then it is
implemented as planned under observation of the term of notice. (3d). Ultimately, the
conduct of both parties and the company culture decide the enforceability of
employer-initiated dismissal.
3. The three levels of action in company reality
The events involved in terminations within the German employment system can be
partly investigated through research by the Company Panel of the Institute for
Employment Research (IAB Betriebspanel), which conducts an annual survey of
15,000 companies of all size and from all branches. The survey is representative and
8
Although the labour courts have a very narrow interpretation of the prerequisites for this provision (Section 9,
Para. 1, Sentence 1 of the Employment Protection Act (KSchG)).
9
Even in Great Britain, the term within which an appeal can be lodged against dismissal is three months. Only
in Austria, where a regulation for severance pay applies, is this term shorter and amounts to only one week
(Zachert 2004).
10
Before the Labour Court – in contrast to ordinary courts – each party must carry the costs of their own lawyer,
regardless of whether they win or lose (Section 12 a Labour Court Act (ArbGG)).
11
By dismissal on urgent operational grounds, it is in the employer’s interests to release the dismissed worker
from duty because the fact of their continued engagement makes it more difficult to prove that the position has
become redundant. The company’s financial risk increases with the duration of the labour court proceedings.
Companies that are well informed about labour law usually dismiss the employee again under other grounds
during the proceedings in order to minimise the risk of having to pay backpay.17
therefore reflects the structure of the 2.1 million companies in Germany. Analyses of
the IAB Panels are used here, above all to test the reliability of our special surveys. 12
However, his data set contains very little information about specific termination
procedures.
The Institute for Economic and Social Research (WSI) at the Hans Böckler
Foundation therefore conducted a survey of persons and a survey of companies in
cooperation with Infratest, Munich, to investigate events associated with termination.
The “WSI Survey on the Termination of Employment Relationships” provides, above
all, person-related information about how the employment relationship was ended.
This involved questioning 2,407 persons in 2001, whose employment relationship
had ended within the questioning period. 13
With the “WSI Survey on Company Personnel Policies” in 2003, information was
gathered about the application of the Employment Protection Act. It was based on a
representative survey of persons with personnel responsibility in 2,000 private
companies. 14 The table below differentiates according to company size where
possible. For this purpose, we divided the companies into size classes and in
keeping with the definition of the European Union used the following designations:
“Small and medium-sized enterprises” (SME) for all operational units/companies 15
with up to 249 employees; broken down into: “smallest companies“ for companies
with up to 10 employees, “small companies“ for companies with 11 to 49 employees
and “medium companies“ for those with 50 to 249 employees. “Large companies“ in
contrast are those with more than 250 employees. 16
12
The IAB-Betriebspanel data used here excludes public sector data because personnel policy in this area is
atypical. As such, all Betriebspanel data refers only to the private economy.
13
The survey period lay between September 1999 und November 2000. A prerequisite was the respondent had
terminated an employment contract during this period, either through dismissal or because they had quit,
through dissolution of the employment contract or through expiry of a fixed term contract. The results of this
survey were published in (Bielenski et al. 2002; Bielenski et al. 2003; Bothfeld/Ullmann 2004,
Schneider/Ullmann 2006).
14
The survey instrument used was the computer-supported telephone interview. This instrument guarantees
high quality data, partly because fewer questions are left unanswered. The questions especially addressed the
company’s behaviour in relation to hiring and dismissals over a 5-year period (Summer 1998 to the summer of
2003). The results of this study were published in Pfarr et al. (2005).
15
These two terms have different meanings in legal discussion and their use here is not equivalent to their use
in legal dogma, since the empirical basis of the data typically relates to operational units and not to
companies.
16
Since no turnover data was available, we abstained from classifying the companies, according to EU
definition, using this criteria. However, research by the Institute for Small and Medium Size Enterprises, Bonn
(IFM) shows that the additional criteria of turnover does not significantly alter classification according to size
(Institut für Mittelstandsforschung 2006).18
3.1 The relevance of termination of the employment relationship in the German
employment system
The exact number of employment relationship that are terminated annually is not
documented in official statistics and can therefore only be approximately
reconstructed using supporting indicators. For example, the Federal Employment
Agency (Bundesagentur für Arbeit) counts around 7 million entries to and departures
from unemployment per annum, 17 whereby less than half of these (2006: 43 %) were
previously in active employment 18 . From the WSI Survey on the Termination of
Employment Relationships (2001), it can be taken that of all persons whose
employment relationships ended within the survey period approximately half
registered as unemployed (Pfarr et al 2005: 45). If only half of the terminations were
recorded through registration as unemployed and approximately half of the new
unemployment registrations come from paid employment, then the total number of
terminated employment relationships is probably in the order of 7 million per annum.
Choice of Termination Form
Employer-initiated termination competes with other personnel policy instruments and
accounts for approximately a third of regular employment contract terminations.
Calculations from various data sources estimate the employer share of terminations
at 32% (Bielenski et al. 2003). The SOEP 2003 attributes a share of only 26% to
employer dismissals, or 36% with the inclusion of terminations associated with the
cessation of business (on the problems of the individual data sources, cf. Bielenski
and Ullmann 2005). This demonstrates relative stability when compared to the results
of a representative survey of around 2400 companies in the private economy in
1987, in which the share of employer-initiated terminations lay at 27% (Büchtemann
1990: 402). Nevertheless the share of employer terminations and own termination
correlates with the economic situation, as shown in Tables 1a to 1d. While the
German economy was doing well from 2000 to 2002, recession began in 2003 and
continued until 2005. The share of employer-initiated terminations rose from 23% in
2000 to 33% in 2003, before sinking once again (Table 1a). In contrast, the share of
employee-initiated terminations dropped from 42% in the year 2000 to 26% in 2005
(Table 1b).
17
Bundesagentur für Arbeit (Federal Employment Office) (2006) The Labour Market in Figures, Status:
December 2006, http://www.pub.arbeitsamt.de/hst/services/statistik/200612/iiia4/akt_dat_jzd.pdf.
18
cf. Bundesagentur für Arbeit (2004).19
During the same period, the number of unemployed increased by around a million
persons. Apparently the inclination of employees to give up their jobs is lower in
times of high unemployment than during times when labour is in higher demand.
Worker’s reduced mobility during difficult economic times increases the significance
of termination by the employer since the decline of departures of employees reduces
the company’s flexibility.
Tables 1a to 1 d: Share of personnel departures between 2000 and 2005
according to the nature of termination (as % of all terminations) 19
Table 1a: Employer Termination
Employer 100 to >= 250 Total
1 to 5 6 to 10 11 to 19 20 to 49 50 to 99
249
Termination
2000 30% 26% 29% 21% 23% 20% 15% 23%
2001 36% 36% 32% 30% 24% 24% 13% 26%
2002 40% 37% 31% 31% 32% 28% 14% 29%
2003 47% 34% 37% 38% 34% 31% 18% 33%
2004 46% 38% 39% 33% 31% 31% 15% 31%
2005 48% 37% 34% 32% 28% 27% 18% 31%
Source: IAB-Betriebspanel, excluding public services, weighted results.
Table 1b: Own Termination
Own 100 to >= 250 Total
1 to 5 6 to 10 11 to 19 20 to 49 50 to 99
249
Termination
2000 40% 44% 43% 49% 49% 44% 34% 42%
2001 30% 35% 45% 41% 49% 40% 35% 38%
2002 27% 33% 40% 38% 34% 33% 29% 33%
2003 25% 41% 36% 29% 30% 24% 24% 29%
2004 25% 32% 31% 31% 30% 22% 22% 27%
2005 22% 33% 30% 29% 27% 25% 22% 26%
Source: IAB-Betriebspanel, excluding public services, weighted results.
19
Terminations due to the completion of training, retirement and “other causes” (i.e. termination due to
occupational disability and relocation to other companies) are not shown here.20
Table 1c: End of Fixed Term Contracts
20 to 50 to 100 to >= 250 Total
Fixed Term 1 to 5 6 to 10 11 to 19
49 99 249
2000 5% 4% 3% 7% 9% 13% 19% 10%
2001 5% 6% 4% 6% 9% 16% 22% 11%
2002 5% 3% 4% 9% 12% 16% 26% 13%
2003 5% 5% 3% 11% 17% 17% 21% 12%
2004 4% 5% 7% 14% 11% 22% 26% 15%
2005 3% 5% 9% 14% 18% 23% 21% 14%
Source: IAB-Betriebspanel, excluding public services, weighted results.
Table 1d: Dissolution
100 to >= 250 total
Dissolution 1 to 5 6 to 10 11 to 19 20 to 49 50 to 99
249
2000 4% 5% 4% 4% 4% 6% 9% 6%
2001 6% 3% 5% 4% 5% 5% 8% 6%
2002 6% 6% 4% 4% 6% 7% 9% 6%
2003 4% 4% 6% 5% 6% 9% 10% 7%
2004 4% 6% 4% 4% 5% 6% 10% 6%
2005 4% 5% 2% 5% 8% 6% 11% 7%
Source: IAB-Betriebspanel, excluding public services, weighted results.
These results require differentiated interpretation on another count. Considering the
nature of termination according to company size class shows that employee-initiated
terminations are of much greater significance in small companies than in large
companies with more than 250 employees. In contrast, large companies use the
option of fixed-term employment to a much greater extent than the small company
classes with up to 50 employees. These size related differences are contingent on at
least two factors. Firstly, the staff turnover in the smallest companies is markedly
higher than in large companies (Bielenski et al. 2003; Erlinghagen/Knuth 2003), so
that the need for employer-initiated termination is much more probable in large
companies simply as side-effect of size. At the same time, the smallest companies
have access to fewer alternative instruments for reducing personnel, whether
because they lack the knowledge and practice in relation to labour and social
legislation, or because their internal flexibility is limited. For example, in 2003 only
2.1% of all companies engaged temporary workers to the key date 30.6. compared to
36% of companies with more than 250 employees. 20 The use of fixed-term
20
Source: IAB-Betriebspanel 2003, excluding public services; own calculations, weighted results.21
employment, also increases with company size (Düll/Ellguth 1999: 173; see also
Hagen/Bookmann 2002). At the same time, large companies use dissolution
contracts more often than smaller companies. We don’t know the content of these
contracts. There is no data available, but it can be assumed that large companies
often agree to severance payments in dissolution contracts. Nevertheless, the data
shows that companies don’t use dissolution contracts more frequently in
economically difficult times. Apparently they manage to dismiss the employees they
no longer require.
Termination Initiative
Die relative significance of employer-initiated termination doesn’t support any
conclusion about the concrete events involved in the termination. In fact, it could be
part of company strategy to call on employees to quit themselves when necessary or
to offer a dissolution agreement. In that case, not the formal execution of termination
but rather the initiative to end the employment relationship would be crucial. The
results of the WSI Survey on the Termination of Employment Relationships (2001)
show that more terminations were initiated by employers (44%), than by employees
(32%; Table 2). If one considers the form of termination by initiative, it becomes
apparent that the employers who want to separate from employees rely on employer-
initiated termination in only 58% of cases and let fixed-term contracts expire in 32%
of cases. At 8.5%, dissolution agreements are relatively infrequent in employer-
initiated terminations 21 , and the situation where employees quit in response to the
employer’s initiative was also found to be rare, with a share of only 2%.
Among employees, the share of self-initiated terminations (49%) is also greater than
the share of own terminations (39%). In most cases (75%) employees who wanted to
end their employment relationships decided to quit however, some managed to
conclude a dissolution agreement (11%), with their employer and only a few (6%)
had their employer dismiss them.
21
In this analysis no distinction was made between whether the agreement was made out of court or on the
basis of a compromise suggested by the Labour Court.22
Table 2: Initiative and form of termination during the period 9/1999-11/2000
(in % of respondents)
Proportion: by formal type of termination (Row percentages)
Total
Termination by Termination by
Dissolution Fixed Term
Employer Employee
Formal nature 100
32 (758) 39 (930) 10 (242) 20 (464)
of termination (2394)
Employer 44.0 10
57.5 (605) 1.8 (19) 8.5 (90) 32.2 (339)
Initiative (1178) 0
Employee 49.2 10
6.2 (73) 75.1 (885) 10.8 (127) 7.9 (93)
Initiative (1053) 0
Mutual Initiative 10
6.8 (163) 49 (80) 16 (26) 15.3 (25) 19.6 (32)
0
Source: WS Survey on Employment Relationships 2001; own calculation. Weighted share in percent, unweighted no. of cases
in brackets; Details of mean deviation are available on request.
Around 7% of all terminations resulted from the joint initiative of the employee and
employer. In half of all cases the employer issued the termination; dissolution
agreements were only seldom negotiated (15.3%).
During the survey period, employees quitting on their own initiative represented the
most frequent case (37% of all terminations); the terminations initiated and issued by
employers followed in second place with 25%. The third largest group was formed by
fixed term contracts concluded on the employer’s initiative (14%). As such, employer-
initiated termination stands in competition to the instrument of fixed-term contracts
when it comes to the adjustment of personnel resources, but also to finding a
common solution with the employee. In view of the high share of terminations by
employees, it should be considered that the positive labour market development
during the survey period (Autumn 1999 to Autumn 2000) had a positive influence on
the number of employee-initiated terminations. In contrast, an increase in employer-23
initiated terminations is to be expected during times of increasing unemployment (cf.
Table 1a).
3.2 The application of employment protection legislation in company practice
Section 2.3 presented the spectrum of theoretical options for action that companies
have at their disposal to reduce their personnel. In the previous section, it was shown
that employer-initiated terminations represent only a small part of the total
terminations. In this section, we will illuminate the individual stages of action in an
employer-initiated termination and attempt to illustrate their relevance in practice
using available empirical material.
Inquiry into legitimacy and the term of notice
Minimum employment protection 22 and the terms of notice of termination are
regulated in the German Civil Code (BGB), which applies to all companies. The
statutory term of notice of termination for employers depends on the employee’s
tenure and is first set at over 6 months for tenure of more than 15 years. Aside from
this, a probationary period of up to six months can be agreed to, within which the
employment relationship can be terminated with two weeks notice (Section 622 III
BGB). However, the statutory terms of notice are fully subject to collective wage
agreements so that they can be lengthened or shortened by collective regulations.
A “special dismissal protection” that precludes the statutory notice of termination can
be agreed to in collective wage agreements. This is usually coupled with the
achievement of a specific age and duration of tenure in the company (WSI 2003). 23
Special legislation prohibits issuing notice of termination to pregnant women, mothers
for 4 month after giving birth and employees on parental leave, and to members of
the works council, youth trainee representatives and disabled persons. 24 However,
22
According to the jurisprudence of the Federal Constitutional Court (BVerfG), the general clauses of civil law
(Section 242 of the German Civil Code (BGB) – In good faith, and § 138 – Immoral Transactions) provide the
basis for minimum protection from arbitrary dismissal (Federal Constitutional Court judgement of 27.01.1998,
Neue Zeitschrift für Arbeitsrecht, Issue 9, 1998, p.470).
23
According to the jurisprudence of the Federal Constitutional Court, should continued engagement be
absolutely impossible, e.g. because the entire company closes, employees under special dismissal protection
can also be dismissed, though with long terms of notice, cf. Federal Labour Court (BAG) judgement of
06.10.2005, 2 AZR 362/04, published under: www.bundesarbeitsgericht.de.
24
The provisions for special dismissal protection, among other things, regulated by Section 15 of the
Employment Protection Act (KSchG), for pregnant women and mothers for the first four months following birth
by Section 9 of the Maternity Protection Act (MuSchG), for employees on parental leave and 8 prior to giving24
this employment protection is not absolute since the German Civil Code (BGB)
provides employers with the right to dismiss any employee without notice “on
important grounds” (Section 626 BGB). Government authorisation must be obtained
for the dismissal of persons whose employment is covered by special legislation
prohibiting termination (for persons with disability: Sections 85 ff. of the German
Social Code (SGB IX)). This authorisation can also be granted for the regular
dismissal of a pregnant woman or young mother during the four-month period
following giving birth if the dismissal has nothing to do with her condition or situation
(Section 9, Subsection 3 of the Maternity Protection Act (MuSchG)).
Little is known about the application of these special regulations, the suspension of
the special regulations prohibiting dismissal or the number of dismissals issued
without notice. The survey results show that the terms of notice are observed in the
overwhelming majority of cases: in 83% of cases of employee-initiated termination
and in 85% of cases of employer-initiated termination. 25 Whether the non-observance
of the terms of notice is due to failure to comply with the statutory regulations or
justified termination without notice is unknown. But surely dismissal without notice
represents only a small share of all terminations. There is an additional regulation for
collective redundancies that requires notification of the Federal Employment Agency
(Agentur für Arbeit). 26 The Agentur für Arbeit can withhold agreement to the planned
date of the dismissals and in doing so delay them by one, or in individual cases by
two months.
In specific cases of multiple dismissals by companies with more than 20 employees,
a social plan must be compiled in cooperation with the works council, given that the
company has one. 27 The survey results show however, that dismissals seldom occur
within the framework of a social plan: Although 44% of those made redundant
birth, by Section 18 of the Child Support Payment and the Parental Leave Act (BerzGG), i.e. since 01.01.2007
by section 18 of the Federal Parental Benefit and Parental. Leave Act (BEEG).
25
Source: WSI Survey on the Termination of Employment Relationships (2001); own calculation, weighted
results.
26
Section 17 of the Employment Protection Act (KSchG) demands notification of dismissals before the
employees are issued with notice of dismissal if, within a period of 30 days, a company with between 20 und
60 employees intends to dismiss 5 of them, a company with between 60 and 500 employees intends to
dismiss 10 percent or more than 25 employees, or when companies with at least 500 employees intends to
dismiss at least 30 of them on urgent operational grounds.
27
One case where this is required is changes to a company that involve only the dismissal of staff. Section 112a
of the Works Constitution Act (BetrVG) also sets thresholds beyond which the formulation of a social plan is
obligatory. These are more generous than the thresholds defined for the obligatory notification of dismissals
acc. to Section 17 of the KSchG. Here, companies with 55 employees, of whom 6 are to be dismissed, must
notify the Federal Employment Agency, but they are first required to formulate a social plan when 11
employees are to be dismissed. The obligation to create a social plan does not apply to companies that have
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